Family Dollar Slices Softlines

As its low-income customer base suffers through increasingly difficult economic times and high unemployment rates, neighborhood deep-discounter Family Dollar is giving added attention to its more "necessary" product assortments — consumables — vs. the discretionary goods like home décor and apparel.

"Our customers, who often manage with less than $30,000 a year, began feeling the pressures of the economic slowdown well before other higher income customers," Howard Levine, chairman and ceo, explained during the 6,500-plus unit chain's fourth-quarter and year-end earnings call earlier this month.

"Thus, quickly we began seeing shifts in our business much earlier than many other retailers," he continued.

To tackle the changing sales dynamics occurring at the stores, Family Dollar "adjusted our merchandise assortments quickly, making investments in the consumables categories that our customers need the most," during the second half of the 2008 fiscal year, he said.

That action resulted in an improvement in comp-store sales trends to a 5.6% increase in fourth quarter from a 1% decline in the first quarter.

"Building on the trend established in the third quarter, consumables continued to be the primary driver of dales, increasing approximately 10% on a comp basis," he said. "As our customers had less money to spend, discretionary categories would face more risk. Therefore, even as we made investments in key traffic driving categories, we reduced our exposure to more discretionary categories like apparel and home."

This related action had a favorable outcome, too: fewer markdowns in the second half of fiscal 2008 and double-digit reductions in discretionary inventories by yearend, Levine noted.

Net income per diluted share in the fourth quarter of Family Dollar's fiscal 2008 increased 46.2% to 38 cents, compared with 26 cents one year ago. Net income rose 40.7% to $53.2 million, from $37.8 million last year.

Quarterly sales of $1.77 billion were up 8.2% from $1.632 billion in the year-ago period. Same-store sales grew 5.6%.

Strong sales and smart cost controls in the fourth quarter — combined with having fewer shares on the market — yielded full-year gains for Family Dollar in both top line volume and earnings per share.

In full year results, EPS grew 2.5% to $1.66, even as net income sagged 4.0% to $233.1 million. Sales of $6.984 billion were 2.2% higher than 2007 sales of $6.834 billion. Comp-store sales increased 1.2%.

Levine said the Q4 sales performance of more discretionary categories "improved from trends we experienced in the third quarter." Seasonal and electronics categories improved "nicely" from third quarter trends, comping in mid-single digits, "while the apparel and home categories were less negative," than they had been, he said.

Aiding the in-store effort to buoy soft-selling discretionary categories through the challenging fourth quarter, "we believe," he said, were the government stimulus checks, more seasonable weather patterns and a more aggressive advertising strategy.

Looking ahead to the first quarter and new fiscal year, Family Dollar remains committed to "aggressively limiting" its inventory risk in more discretionary categories. At the end of fiscal 2008, overall average inventory per store was about 6% lower than average inventory per store at the end of fiscal 2007. "This reduction was the result of double-digit inventory declines in each of our three discretionary categories," he said.

By the same token, the retailer plans to bank more heavily on its growing consumables offerings — dubbed its "traffic-driving category" — with a broader assortment, including more private label goods, "to give our customers what they need in these challenging times."

Family Dollar is No. 12 on the HTT Top 50 Retailing Giants, with 2007 home textiles sales of $402 million.